Thursday, June 19, 2008

Using the NYSE TICK to Interpret Market Behavior

If you click on the bottom chart, you'll see a five-minute chart of the NYSE TICK for Wednesday, with a 10-bar moving average superimposed in blue. Note that the scale for the raw TICK values appears at right, but the scale for the moving average is constructed at left. That enables you to see peaks and valleys in the moving average quite well. It also helps us see how these peaks and valleys line up with relative highs and lows in the S&P 500 contract (top chart).

In a rising trend, we'll see successive peaks in the moving average of the TICK correspond to higher price highs in the index over time. In a falling market, we'll see lower price lows with each fresh valley in the TICK. In range markets, we'll see new peaks and valleys in the moving average of the TICK fail to bring either new price highs or lows.

Recall that the TICK is measuring the number of NYSE stocks trading on upticks minus the number trading at on downticks. This captures the short-term sentiment of traders, as they either aggressively lift offers across stocks or hit bids. A moving average of TICK thus can be thought of as a kind of overbought/oversold index of sentiment. Some of the best selling opportunities occur at TICK moving average peaks that fail to make fresh price highs; some of the best buying opportunities occur at TICK moving average valleys that cannot generate new price lows.

This style of trading has you executing in a countertrend fashion, but aligning the trade with a longer-term trend. I have found such an approach to be very useful, particularly in guiding execution.

Finally, notice that the moving average of the TICK spent most of the day below the zero (pink) line. That tells us that selling sentiment dominated through the day. By observing whether the moving average is spending more time above or below the zero line (and seeing how that is impacting price), we can gain tremendous insight into the supply/demand dynamics of the market as they unfold.

With frequent observation, you can become quite adept at filtering the market's behavior through the lens of the TICK. It provides a rare window on the actual buying and selling decisions of traders across the entire stock market.

About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), and Trading Psychology 2.0 (Wiley, 2015) with an interest in using historical patterns in markets to find a trading edge. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab). I teach brief therapy as Clinical Associate Professor at SUNY Upstate in Syracuse, with a particular emphasis of solution-focused "therapies for the mentally well". Co-editor of The Art and Science of Brief Psychotherapies (American Psychiatric Press, 2012). I don't offer coaching for individual traders, but welcome questions and comments at steenbab at aol dot com.